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Yen soars on recovery hope
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August 19, 1999: 6:28 a.m. ET
Japanese currency hits lows against dollar, euro; U.S. trade gap, economy weigh
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LONDON (CNNfn) - The soaring yen continued to dominate volatile currency markets Thursday on growing optimism about the Japanese economy and concerns its trade balance with the United States will widen.
A surge in funds flowing into Japan pushed the currency to a new six-month high of 111.24 yen against the dollar in Asian trading, firmly below the 112 yen level breached in New York Wednesday. The dollar recovered just slightly at the start of European trading
Analysts said a combination of increased optimism about the Japanese economy and concern about the sustainability of the U.S. boom were driving the markets.
"We are seeing a belief that the Japanese economy is recovering," said Paul Donovan, economist at Warburg Dillon Read in London. "The Japanese are going to keep their money at home and overseas investors are going to put more to work in Japan."
Donovan said the U.S. current account deficit is also starting to weigh on investors' minds. Strong economic growth has sucked in imports to the extent that the United States needs to borrow the equivalent of 3 percent of GDP every year to fund the deficit. "So far [investors] have been happy to do this but people are questioning whether it will continue," he said.
The potential for the yen to climb even higher may hinge on the outcome of tensions between Japan's Ministry of Finance and the Bank of Japan. The ministry declared last month that 120 yen was a comfortable level for Japanese exporters, which were hit by a sell-off in Tokyo Thursday as investors worried about their competitiveness.
The Bank of Japan intervened heavily last month at the 115 yen level but the central bank is keen to avoid a repeat. "The intervention at 115 was pretty ineffective and they don't want to waste money again," said Donovan. "The Bank of Japan would not be happy about [defending] 110 yen."
The yen strength also extended to the euro, which slipped to a lifetime low of 116.62 yen Wednesday before firming to 117.25 after the influential Ifo business confidence survey in Germany came out above expectations Thursday.
The Ifo data also boosted the euro against the dollar after the single currency fell below $1.05. The euro traded around $1.0540 in European trading. 
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